Economics for the Earth Blog

Firestorm over Seoul: Lessons for the Trans Pacific Partnership

Posted Mar. 29, 2012 / Posted by: Bill Waren

Two days ago, President Barack Obama returned from a state visit to South Korea. The trip coincided with the entry into force this month of the U.S.-Korea free trade agreement, which Obama touted as a “win for both counties” at a Seoul news conference. But the president’s statement is in sharp contrast to the firestorm of opposition to the trade pact that has ignited in Korea, casting a pall over his administration’s plan for a more ambitious regional trade agreement, the Trans Pacific Partnership.

South Korea has attempted to clean up its environment by adopting improved regulatory standards, but the FTA will help U.S. investors challenge these standards. Foreign corporations can sidestep local courts and bring suits before international tribunals set up exclusively for investors. These tribunals may treat environmental regulations that incidentally thwart a multinational corporation’s expectations of future profits as if they were a government taking of real property to widen a highway, an action requiring the government to pay fair compensation.

Similarly, in the United States, the FTA investment chapter will allow Korean multinationals to bring suit before these business-friendly tribunals. The litigation risk is high given the scale of Korea’s investment in the U.S., $13 billion in 2007, and the environmentally sensitive nature of many of its investment projects. For example, the Korea Electric Power Corporation is invested in Dennison Mines, a Canadian company seeking to mine uranium near the Grand Canyon. And, Samsung won a $411 million contract to build a chlorine plant in Freeport Texas, which is expected to produce 816,000 tons of the chemical every year. The FTA could facilitate challenges to environmental enforcement actions against these and other projects.

On February 8, members of the Korean parliament from the opposition United Democratic Party wrote President Obama calling for the U.S.-South Korea FTA to be substantially revised. They noted that when the ruling party of President Lee Myung-bak rammed the U.S. – Korea deal through parliament, Koreans took to the streets in protest, demanding its immediate repeal. The public pressure was such that even members of the ruling party eventually joined the UDP in passing a resolution calling for the renegotiation of the investment chapter of the U.S.-Korea FTA. The letter to President Obama went on to say that if the opposition demands for revision of the investment chapter and similar concerns were not met, they were prepared to take action to hamstring implementation of the FTA.

A separate court for foreign capital. Friends of the Earth in an analytic issue brief published earlier this year notes that “foreign investors are granted expansive rights by the investment chapter of the Korea FTA. It allows these investors to bypass domestic courts and bring suit before special international tribunals designed to encourage international investment.” The UDP letter to Obama states that, “…such a malignant procedure [investor-state arbitration] is unnecessary; given the fact that both of our countries have well-established rules of law and well-functioning courts.”

Paying to regulate. “Chapter 11 of the Korea FTA,” according to Friends of the Earth, “will allow investors to seek awards of money damages, of unlimited size, in compensation for the cost of complying with environmental and other public interest regulations, including climate change measures.” Similarly, the UDP says that, “The investor-state dispute settlement procedure allows private corporations to bring the government of either party of the agreement to foreign arbitration tribunals to demand compensation for public policy standards…”

Greater rights for investors than the U.S. and Korean Constitution. According to Friends of the Earth, “Chapter 11[on investment] will also allow foreign investors to sue governments directly when they believe laws or regulations impinge upon their rights under the agreement. These rights are more broadly defined in the Korea FTA than in U.S. constitutional law. They include the designation of expected future profits as a property interest. and procedural rights that are unavailable under U.S. law.” Again, the UDP parliamentarians brought up a similar point, arguing that the investment chapter is “directly in conflict with Article 119 of the Constitution of the Republic of Korea, which obliges the state to intervene for economic democratization.”

The political firestorm in Korea & lessons for the Obama Administration.

The U.S.-Korea free trade agreement came into effect this month, on the 15th of March, even as masses of Koreans protested on the streets of Seoul. The protestors denounced the investment chapter of the FTA and demanded the resignation of President Lee. The right-wing government of President Lee and the United States had rushed to implement the trade deal before the Korean parliamentary elections on April 15 because of the growing controversy about its investment chapter.

Public opinion polls in Korea show that the center-left Democratic United Party is likely to win the April parliamentary elections, in part because of the unpopularity of the trade agreement’s investment chapter. The UDP is threatening to block measures needed to comply with the trade pact unless the investment chapter and other provisions of the agreement are fundamentally reformed. In response, Korean trade minister Bark Tae-ho has made vague promises that he will negotiate further with the Obama administration on reforms of the investment chapter. While it is unclear whether the UDP can effectively block implementation of the agreement, further confrontations are expected on the streets of Seoul and in the halls of South Korea’s National Assembly.

The donnybrook in Korea over the investment chapter and related provisions of its FTA with the U.S. should not be ignored by the Obama administration as it seeks to negotiate a Trans Pacific Partnership trade agreement with other Pacific and East Asian nations, potentially including Japan. Already, Australia is refusing to agree to a TPP investment chapter based on the model of NAFTA and the Korea FTA. The reaction of the Korean people and the Australian government demonstrates that the United States makes few friends internationally by catering to corporate special interests. As Friends of the Earth has told Ambassador Ron Kirk, the U.S. Trade Representative, the administration’s discredited model for trade agreements and investment provisions in particular must be scrapped in the TPP and all future negotiations. The voting public, at home and abroad, will be paying attention.